23andMe: Building a Genetically-Sound Company

Every human possesses a unique set of characteristics housed in billions of genetic base pairs that make up the double helix known as ‘DNA’. These unique genetic variations define who we are and how we react to the outside world. Until recently, obtaining this information was largely inaccessible due to high associated costs and an overall lack of awareness and demand from consumers. Fortunately, technological advancements in genetic sequencing have made this information both accessible and usable. Innovative companies such as 23andMe are at the forefront of leveraging genetic data to help us understand ourselves better than ever before.

23andMe is the first genetic testing company to be approved by the Food and Drug Administration (FDA), having received approval for the application of 10 different tests in April 2017. The company collects DNA samples from customers, analyzes the genetic makeup, and synthesizes these findings into personalized reports with analysis on ancestry and genetic predisposition to health risks based on each customer’s unique genetic variants.

Through this, 23andMe accumulated the world’s largest bank of sequenced genetic data that contains 1.2 million records, of which 80 per cent is consented to be used for research. This data is monetized through partnerships with pharmaceutical companies, research centres, and NGOs. Given the lack of research surrounding the effectiveness of leveraging genetic data to inform medical decisions, 23andMe’s business model is exposed to regulatory intervention, which limits the scope of information shared within its direct-to-consumer genetic reports.

Against 23andMe’s Genetics

As of 2016, the global pharmaceutical development industry is worth $158.0 billion, and many companies, both small and large, are aggressively competing to capture and retain market share. Drug development has significant financial and human capital requirements. In addition, future cash flows are highly uncertain and often hinge on receiving the highly sought-after FDA approval.

23andMe currently has research programs targeted toward therapeutic development in oncology, skin, respiratory, and cardiovascular disease. The company recently hired a former executive of the pharmaceutical giant Genentech, which specializes in biotech cancer drugs, to lead the initiative as Chief Scientific Officer and to begin building out the human capital needed for drug development. However, the likelihood of success within this space is low given 23andMe’s lack of experience, reputation, and financial resources relative to large pharmaceutical players.

In an effort to diversify revenue streams and hedge overall operating risk, 23andMe raised a $250 million round of funding led by Sequoia Capital and announced its intention to enter the drug development space. Although 23andMe has invested heavily in drug development, the process of developing a drug from experimental trials to FDA approval costs, on average, $2.6 billion, a sizable figure when compared to 23andMe’s $1.75 billion valuation. This figure is comprised of $1.4 billion in out-of-pocket costs, including cost of research, discovery, development and preclinical research, and $1.2 billion in time-related costs, defined as the opportunity costs associated with pursuing a project. Additionally, 23andMe’s proposed model of translating genetic findings into drugs can take even longer. Therefore, even if 23andMe does discover potential leads in early experiments, the company will likely have to rely on partnerships to finance and execute the development, refinement, and screening of compounds. Partnerships allow start-ups to access deep corporate pockets and resource troves which can subsequently accelerate product development—something especially useful for startups that deal with long product development cycles.

Whereas most large pharmaceutical companies can implement a portfolio approach to hedge their risk, smaller, less-established pharmaceutical development companies lack the resources to do so and must concentrate on only a few drugs. This implies that 23andMe would assume high financial risk, which could compromise its core direct-to-consumer genetic testing business. Instead, digital therapeutics, an emerging industry, offers a better strategic fit as an entry point for 23andMe.

Digital Therapeutics: An App-ealing Opportunity

For the first time ever, software in the form of games or apps can replace pills and therapist visits as therapeutic treatment. Digital therapeutics leverage technology to encourage behavioural and lifestyle changes that can treat, prevent, and manage a number of medical and psychological conditions. These treatments can be prescribed as standalone therapy or used in conjunction with traditional pharmacological therapy. The notion of an FDA-cleared, software-based therapeutic solution is a new concept with immense potential to disrupt therapeutic treatment for a number of medical ailments.

Digital therapeutics is projected to be a $9.4 billion market by 2025. The industry is projected to grow at an annual rate of 21 per cent, outperforming the broader pharmaceutical market which is projected to grow at an annual rate of 6.3 per cent. 64 per cent of pharmaceutical companies participating in a Deloitte study have already used digital technologies in clinical trials, while 97 per cent have indicated plans to implement it. This signals an industry-wide shift towards leveraging technology in both development and treatment initiatives, which is supported by potential savings and valuable data collection opportunities.

Goldman Sachs projects over $305 billion in savings with the rise of digital healthcare pointing towards a shift in future healthcare spending. In 2016 alone, U.S. healthcare spending totalled $10,348 per person; given that 18 per cent of U.S. GDP is related to healthcare expenditure, digitization can yield large savings. In addition to cost savings, the software-based nature of digital therapeutics collects data that can increase overall transparency for all stakeholders.

Digital therapeutics enable the collection of valuable data that tracks how, where, and when users interact with the app. This data can be utilized by other digital therapeutics developers, doctors, patients, and insurance companies to track the efficacy of the treatment method in unprecedented ways. Insurance companies often cover partial or complete costs for most prescription drugs depending on individual coverage levels, but it is difficult to track whether the policyholder is using the drugs as prescribed, or even using them at all when treatment is in the form of pills. Data collected from digital therapeutics enables insurers to monitor the usage patterns of their policyholders, thus facilitating a more robust understanding of their policyholders. Additionally, insurers can actively monitor patient-treatment compliance and actively adjust premiums to account for the differential risk on an individual basis.

As many insurers move towards an adaptive insurance approach, they are leveraging real-time data from technology, such as personal fitness trackers, to adjust their risk models and take an active role in risk management. Insurers can do this by using monetary rewards, such as lower premiums, to reward risk-reducing behaviour such as reaching the daily recommended step count. Digital therapeutics conforms with this broader trend, and the data provided will help increase efficiency within insurance, drug development, and treatment.

Pear-scribing a Way Forward

23andMe should enter the emerging digital therapeutics space via an acquisition of Pear Therapeutics (Pear). Acquisition is not uncommon in the therapeutics industry, with an average of 28 acquisitions of research and development (R&D) -stage companies occurring annually. Pear is an established digital therapeutics developer with the first FDA-cleared digital therapeutic on the market.

Entering digital therapeutics via acquisition is better than entering organically for two main reasons: reputation and timing.

Pear has one of the most established reputations among digital therapeutics developers, which has attracted interest from patients, insurers, and regulators. Pear was one of nine companies selected to participate in the FDA’s pre-certification program, which seeks to expedite the FDA-clearance process for firms deemed to be safe and responsible. This differentiation, combined with being an FDA-approved first-mover, contributes tangible and intangible benefits to Pear’s brand ultimately increasing the inimitability of its competitive advantage. Taking advantage of Pear’s preferential treatment with the FDA will yield significant cost and time savings during the development process.

Given the early stage nature of digital therapeutics regarding industry life cycle and degree of technology adoption, entering the market in a timely manner is crucial to capitalizing on growth as market saturation increases. The average time for FDA clearance of a new device is around half a year, not including the time required to develop the device and restructure business units. Assuming that the combined entity of Pear and 23andMe can capture a conservative 10 per cent of the digital therapeutics market over the next three years given their first-mover advantage, the implied opportunity cost of organic entry is approximately $840 million in foregone revenue.

23andMe and Pear Therapeutics: Two Complementary Base Pairs

Pear Therapeutics’ current work in treating major depressive disorder aligns with 23andMe’s past work in depression, illustrating the potential benefits of a combined entity. A digital therapeutic solution will increase the accessibility of depression treatment to individuals where cognitive behavioral therapy would not otherwise be attainable, thus ensuring that patients receive the treatment they ought to have. In addition, 23andMe has experience aggregating large groups of research participants with required characteristics, which they can leverage to access potential participants for clinical trial recruitment.

Patient recruitment typically comprises around one-third of clinical trial costs. Moreover, one third of FDA Phase III clinical trial failures result from the inability to recruit participants. By leveraging previous experience with research participant aggregation, 23andMe can streamline Pear’s patient recruitment process and offer preferential access to participants, thus lowering costs and increasing patient retention, another common issue in clinical trials. Consequently, it would increase the efficacy of these trials while simultaneously reducing costs associated with participant replacement.

If 23andMe has a vested interest in Pear’s digital therapeutic development, the two companies can follow a collaborative building process for their apps that facilitates a smoother, more efficient flow of data. The benefits are two-fold. First, genetic data can be integrated into the R&D for digital therapeutic development. Second, the data collected by the apps could highlight the value of incorporating genetic data for the medical community and reduce the amount 23andMe needs to spend on other research.

Overall, 23andMe’s vision to be at the forefront of healthcare technology is aligned with Pear Therapeutics’ revolutionary work in digital therapeutics. According to the FDA, advances in computational power are paving the way for personalized medical treatments that consider a patient’s genetic, anatomical, and physiological characteristics. As both companies invest in research to validate the effectiveness of their respective technologies and methods, cost efficiencies can arise through the consolidation of redundant research efforts.

Personalized Medicine: Symptoms of Change

Beyond any profit-seeking objectives, entry into digital therapeutics satisfies 23andMe’s mission to revolutionize healthcare and to help people access, understand, and benefit from an understanding of the human genome. To achieve this, digital therapeutics optimizes usage patterns and personalizes its platform accordingly.

In the future, 23andMe can evolve from informing drug development toward a more active role in treatment decisions in the form of “Therapygenetics.” The term is used to describe the differential response individuals have to behavioral treatment based on their genetics, and would involve using each user’s unique genetic characteristics to optimize the selection and delivery of treatments. The end result is an additional layer of personalization.

Entry into digital therapeutics is a necessary first step towards personalized medicine. Since the decrease in the cost of genetic sequencing, scientific advances have made personalized medicine a reality, but one that faces barriers of validation and regulation before mainstream adoption. Currently broader, more universally applicable treatment approaches are preferred due to the economics of drug development; however, the FDA recognizes that “the advent of mobile and wireless capability, better sensors, interoperable devices, and the Internet have led to technologies that allow for more effective patient monitoring and treatment outside the traditional medical care settings.”

Healthcare continues to evolve alongside research and technology but requires bold companies like 23andMe to continually challenge the status quo. Similar to its revolutionary work in direct-to-consumer genetic testing, an opportunity exists for 23andMe to push the envelope in digital therapeutics. Acquiring Pear Therapeutics and entering into the digital therapeutic development is clearly consistent with both 23andMe’s corporate strategy and DNA—no genetic testing required.

Ivey Business Review is written, designed, and managed by undergraduate students at the Ivey Business School and is the only publication of its kind in the country. IBR publishes two issues annually in December and April with content created exclusively by students and maintains an active blog, curated by the IBR Editorial Board, with contributions from students and young alumni.